Last marker before the election as markets look to UK Budget

01:00, 16 mars 2015
· Av CMC Markets

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Over the past few months the performance of the pound has been somewhat mixed after a bit of a nose dive in the lead up to the Scottish referendum. Having circumnavigated that particular hurdle investors would have been forgiven for thinking that this particular question had been finally settled.
Unfortunately having seen passions stirred up in the lead-up to the vote it was never likely that the question was going to go away quickly, even though the sharp drop in the oil price has blown an even bigger gaping hole in the nationalists spending plans.
The evaporation in the Scottish Labour vote in the aftermath has made the voting arithmetic that much more tricky in the lead-up this May’s general election and this could well make overseas investors a little twitchy in the likelihood the SNP might get into a position of holding the balance of power.
That debate however will have to wait for another day as we look ahead to Chancellor George Osborne’s final budget of this electoral term, and which looks set to fire the starting gun on seven weeks of electioneering, mud-slinging, scare mongering and name-calling until the vote on the 7th May.
One thing the fall in the oil price has done is deliver a fiscal boost to the UK economy at probably the most fortuitous time for the incumbent government as consumers start to feel the benefits of a trifecta of improving economic data.
Falling unemployment, combined with falling prices and rising incomes after five years of an income squeeze could just be what the Chancellor ordered, but the fall in oil prices brings with it its own problems in the form of reduced revenues from North Sea oil.
This has raised the prospect that the Chancellor might look to lighten the tax load on the incredibly price sensitive environment that is the North Sea, after the sharp falls in oil prices, which have eroded the already slim margins in the industry.
We could also see further measures to tackle tax evasion as well as tax avoidance in the wake of the events surrounding HSBC and the Swiss tax story.
Small businesses will also be looking for additional help in the form of making the tax environment less onerous for a part of the economy that has outperformed Germany over the past five years.
Given the amount of publicity the Labour opposition has received about being anti-business over the last few months, the Chancellor would be foolish to pass up an opportunity to put clear blue water between him and the opposition’s policies.
Pensions are also likely to be a hot topic given the recently announced policy by the Labour party to cut tax relief on higher rate tax payers on their pension contributions.
Will the Chancellor announce an alternative plan to shoot that particular fox?
The Chancellor’s focus will inevitably be on voter’s pockets and their finances so the usual suspects will no doubt come under scrutiny including income tax thresholds, as well as savings products.
With the polls looking increasingly tight and the prospect of the Scottish Nationalists holding the balance of power looking a distinct possibility, this week’s budget could well be the last chance the Chancellor has to highlight the risks of undermining the current stable fiscal governance here in the UK as we count down the days to the May polling day, which means he could well talk about plans that the government intends to implement on a much longer term basis, which would then be at risk in the event of an opposition win, or hung parliament.
Whatever the outcome of the upcoming budget, the government will be anxious to avoid anything that could be construed as damaging to their re-election prospects, though the prospect of an EU referendum in the event of a Conservative majority, is also likely to be a cause for concern for big business.
Despite the uncertainty the pound has been remarkably resilient on currency markets, though it has come under pressure against the US dollar, trading at five year lows, levels last seen in the aftermath of the last election in 2010, as fears rise of political paralysis in the aftermath of the May vote.
The key level on the downside currently sits at 1.4225 which was the May 2010 low seen in the aftermath of the horse trading between the Liberal Democrats and the Conservative party which gave us that historic image in the Downing Street garden that heralded five years of coalition government.
We can only hope that the next five years will be as stable, but given the state of the polls that is by no means certain.
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